Nate Silver, over at 538, a New York Times blog, has a post today about the “none of the above” option in Nevada. It seems that NOTA is polling well enough to have an effect on the Senate race, where a majority dislikes Reid but fears Angle. Lots of comments weigh in on the pluses and minuses of voting for no one.
I’ve thought for a long time that a simple improvement over the current system would be to give voters the option of voting for or against a particular candidate. If they vote for, the candidate gets an additional vote, the way it works now. If they vote against, one vote would be deducted from that candidate’s total.
There are two advantages. First, in many cases it will allow voters to more accurately express their preferences. If you really don’t like candidate X and are neutral about candidate Y, negative voting makes your feelings clear. In fact, if there are more than two candidates in the running, stopping one of them may be your highest priority.
Second, the final tally may give a better representation of the public’s true feelings, especially if the winning candidate is the one with the least negative numbers. We would hear less nonsense about mandates.
Tuesday, August 31, 2010
Virginia Judge Upholds Academic Freedom, Sort Of
The Charlottesville Daily Progress reports that in the morning of August 30, Judge Paul M. Peatross, Jr. of Albemarle County (around Charlottesville) ruled in favor of the University of Virginia against the subpoenas by Attorney General Ken Cuccinelli who sought documents including emails on the research of former U.Va climatology professor Michael Mann, "in their entirety, without prejudice."
Most observers are very pleased with this, including Michael Mann reportedly, now at Penn State, and I am also. However, there is an unfortunate caveat in the story. The judge also ruled that Cuccinelli has the authority to issue further "civil investigative demands" (CIDs), although they need to be more specfic than the ones he issued earlier that were struck down by this judge. Thus, I saw Cuccinelli on local TV earlier this evening proudly declaring that he would be right back at it again with further CIDs for U.Va, although this time more specific so that he can "satisfy this judge." So, unfortunately this business is not over at all, despite this favorable ruling for the moment. The assault on academic freedom will be continuing in Virginia, along with the publicity machine for Cuccinelli to be a big hero for the Know Nothing right wing.
Most observers are very pleased with this, including Michael Mann reportedly, now at Penn State, and I am also. However, there is an unfortunate caveat in the story. The judge also ruled that Cuccinelli has the authority to issue further "civil investigative demands" (CIDs), although they need to be more specfic than the ones he issued earlier that were struck down by this judge. Thus, I saw Cuccinelli on local TV earlier this evening proudly declaring that he would be right back at it again with further CIDs for U.Va, although this time more specific so that he can "satisfy this judge." So, unfortunately this business is not over at all, despite this favorable ruling for the moment. The assault on academic freedom will be continuing in Virginia, along with the publicity machine for Cuccinelli to be a big hero for the Know Nothing right wing.
Friday, August 27, 2010
Any Experts on the German Economy Out There?
The Wall Street Journal has two articles about German. One describes how German wages are stagnating, despite the expansion.
Here is the first articles:
Thomas, Andrea. 2010. "German Workers' Wages Belie Country's Rebound." Wall Street Journal (15 August).http://online.wsj.com/article/SB10001424052748704296704575431240767523752.html?mod=WSJ_World_MIDDLENews
"Germany has surprised the world with a sharp acceleration in its economic recovery, but perhaps the least impressed by this feat are Germans themselves. The German economy expanded a sharp 2.2% in the second quarter from the first -- the fastest pace since reunification in 1990. But, despite the export-driven rebound, most German workers aren't getting any richer."
"Chancellor Angela Merkel's government has hailed Germany's "job miracle" after whittling the jobless rate down to 7.6% of the work force, compared with unemployment levels of about 10% in the U.S. and France. But the bulk of that reduction has come from the emergence of part-time jobs, often at low pay. That helps explain why German domestic demand has remained sluggish even as German exporters boast booming foreign orders. The disparity has drawn accusations from Germany's neighbors, notably France, that it is exploiting the world recovery without contributing to global demand."
"Average annual net income per employee has fallen steadily since 2004, reaching 15,815 euros in 2009, down from 16,471 euros in 2004. As part of the so-called Hartz IV labor-market overhaul program to support low-income groups, the government has spent 50 euros billion in welfare subsidies since 2005 for people who earn too little to make a living."
"Lobby groups for low-paid and unemployed workers worry that an increasing number of jobs have to be subsidized. "Hartz IV has made it possible for companies to get their profit subsidies from the general public, with companies paying starvation wages while those affected need Hartz IV to survive," said Martin Behrsing, spokesman for the Unemployed Forum Germany."
"Another measure for low-income workers is looking at people who earn two-thirds or less of the average income. By that measure, the number of low-paid workers increased by almost 2.3 million people to 6.55 million between 1998 and 2008, according to a recent study by the Institute for Employment and Qualification at the University Duisburg-Essen."
"The Organization for Economic Cooperation and Development's employment outlook report 2010 shows that 21.5% of Germans worked in the low-pay sector in 2008, up from 16% in 1998. In an international comparison, the share of low-paid workers remained unchanged at 24.5% in the U.S. and increased only slightly in the U.K. to 21.2% from 20.8%. The average among OECD countries is 16%."
"I think we have seen in Germany for quite a while now an expansion of the low-wage sector, since the mid, late 1990s," said Herwig Immervoll, an economist with the OECD, which is based in Paris. "There is an increase in the inequality in Germany. We see this in other countries too, but maybe not as much as in Germany."
"Duisburg-Essen University's employment institute puts it even more starkly: "No other country has experienced a similar increase in the low-income sector over the past years and a differentiating of wages to the downside as Germany has," it says in its study."
"The upswing hasn't reached me. What I am witnessing is exploitation. There is more and more low-paid work. People don't find work, and if so only as temporary work, which is a great mistake because it's destroying the wage system," Mr. Friedrich said. "It might well be that the upswing has reached the big companies and that they are making more money, but it's the opposite for the ordinary guy," he said."
"Such sentiments are weighing on Ms. Merkel's center-right government, whose popularity has been tumbling in opinion polls that increasingly favor the center-left opposition. One recent poll showed that four out of five Germans say they aren't personally benefiting from the rebound."
"Hubertus Heil, deputy parliamentary floor leader of the opposition Social Democrats, is angry about the increasing number of subsidized jobs and said a legally binding minimum wage is urgently needed. "It's a shame that people who work full time have to put up with this," he said."
"At present, Germany has no general minimum-wage level. Minimums do exist for specific sectors, such as for the construction, cleaning, waste and nursing sectors. To match the minimum-wage levels in other European countries, Germany would have to introduce hourly minimum pay of between 5.93 euros and 9.18 euros."
"The DGB umbrella group of trade unions has called for an hourly minimum of 8.50 euros. But others, such as the Ifo economic research institute, warn that this could result in the loss of 1.22 million jobs, largely among those earning low incomes."
"Nelli Einstein, a 48-year-old from Berlin, has been selling clothes, bags, jewelry and tools for 1 euros apiece for the past two years. It sometimes takes her as long as a year to sell 10,000 euros of merchandise."
Here is the second article:
Fuhrmans, Vanessa. 2010. "Germany Suffers a Labor Shortage." Wall Street Journal (27 August): p. A 12.
http://online.wsj.com/article/SB10001424052748704913704575453652182261156.html?mod=ITP_pageone_3
"The surprising strength of Germany's economic rebound is exacerbating an already worrying problem for legions of its companie Industrialists and economists long have warned of a looming shortage of skilled German labor, a consequence of the country's declining birth rate and an exodus in recent year of engineers and other highly trained workers, to around the European Union, the U.S. and elsewhere. But the rapid recovery of Germany's export-fueled economy in recent months has suddenly brought the problem home for many domestic companies, which fret that the shortage could restrain their ability to respond to the nascent rebound."
"Though German unemployment still hovers around 7.6%, about 70% of German companies report they are having trouble finding enough master craftsmen, technicians and other skilled labor, according to a survey released this week by the DIHK Association of German Chambers of Industry and Commerce. Companies haven't been able to fill some 36,000 engineering jobs open across the country, the Association of German engineers reports. "
"Bitkom, Germany's largest information-technology industry association, says the same goes for 43,000 IT posts. "
"And this is happening just barely out of the severe recession of 2009," said Hans Heinrich Driftmann, DIHK's president. "As the economy improves and companies need to hire more people, it's only going to get more severe."
"For now, Germany's marquee corporations, such as Siemens AG and BMW AG, have enough skilled job applicants, thanks to aggressive recruiting and generous training programs. But many of the country's Mittelstand, the thousands of small to mid-size companies that are the backbone of its export-led economy and provider of 70% of German jobs, are struggling to find needed employees as demand picks up."
"One is DELO Industrie Klebstoffe GmbH, a Bavarian maker of industrial adhesives. With ?30 million ($38 million) in sales and 230 employees, the family-owned firm is looking to hire another 60 highly skilled workers this year as orders from the electronics, auto and other industries take off. But so far, filling the posts has been difficult."
"We're troubled most of all by the search for technicians and engineers," said DELO Executive Director Sabine Herold. Located near Munich, the company says it is tough to compete for skilled job candidates with better-known companies in the area, so Ms. Herold has been trying to forge closer ties to universities and vocational-training institutes, and sponsoring business programs at local high schools."
""If we're going to expand further, we need smart people right away," Ms. Herold said. "But a lot of school graduates don't know us.""
"Behind the growing shortage is a combination of demographic trouble spots. Like in many European countries, Germany's declining birth rate-at 1.38 children born per woman on average in 2009-isn't enough to keep its population stable. And since 2008, more people have been leaving Germany than immigrating to it. That tendency is particularly strong among those with university or vocational training degrees. Last year, some 27,500 post-secondary-school graduates came to Germany from other European countries, for example, while 32,000 left for elsewhere in the European Union. "
"Economists estimate the skilled worker shortage is resulting in annual economic loss of between 15 billion euros and 20 billion euros, and with that, more potential jobs. "If there isn't enough skilled labor, then there can't be more production," said Klaus Zimmermann, president of the DIW German Institute for Economic Research. "
"Major companies are acting to counter the trend longer term. BMW and Siemens, for example, have expanded in recent years programs that train apprentices in specialized technical fields as they pursue post-secondary degrees at universities or technical colleges, thereby compressing the training time before they can fully join the work force."
""They don't have any difficulties getting hired. They're in great demand," said Gnther Hohlweg, head of Siemens' training programs, who adds that 90% remain with Siemens."
"Others are using older workers. German auto-supplier giant Robert Bosch GmbH maintains a reserve of several hundred semiretired skilled employees between ages 60 and 75 that it taps when it has to ramp up production and can't find enough qualified labor on short notice."
"Daimler AG, which manufacturers Mercedes-Benz cars, anticipates that within 10 years half of its workers will be older than 50 years, compared with 25% now. To accommodate them, it has introduced more flexible shift rotations and installed strength-training equipment near plant assembly lines. According to this month's DIHK survey, 21% of the 1,600 companies polled said they would take steps to draw more older workers."
"As Germany's economy has gathered strength in recent months, the skilled-worker shortage has reignited a debate about immigration policies, and created a new source of tension within Germany's center-right governing coalition."
"Earlier this month, the country's economics minister, Rainer Bruderle, proposed introducing cash "welcome" payments to lure more skilled foreign workers to Germany, as well as lowering the minimum income level it requires for skilled workers to be eligible for extended immigrant status. The current annual income level is 66,000 euros, which many economists and companies say is too high."
"The proposals were quickly rejected by labor leaders, as well as a spokesman for Chancellor Angela Merkel, who said the government just introduced immigration policies in January 2009 aimed at making it easier for foreigners trained in Germany to find work there, and their effect had yet to be felt."
Here is the first articles:
Thomas, Andrea. 2010. "German Workers' Wages Belie Country's Rebound." Wall Street Journal (15 August).http://online.wsj.com/article/SB10001424052748704296704575431240767523752.html?mod=WSJ_World_MIDDLENews
"Germany has surprised the world with a sharp acceleration in its economic recovery, but perhaps the least impressed by this feat are Germans themselves. The German economy expanded a sharp 2.2% in the second quarter from the first -- the fastest pace since reunification in 1990. But, despite the export-driven rebound, most German workers aren't getting any richer."
"Chancellor Angela Merkel's government has hailed Germany's "job miracle" after whittling the jobless rate down to 7.6% of the work force, compared with unemployment levels of about 10% in the U.S. and France. But the bulk of that reduction has come from the emergence of part-time jobs, often at low pay. That helps explain why German domestic demand has remained sluggish even as German exporters boast booming foreign orders. The disparity has drawn accusations from Germany's neighbors, notably France, that it is exploiting the world recovery without contributing to global demand."
"Average annual net income per employee has fallen steadily since 2004, reaching 15,815 euros in 2009, down from 16,471 euros in 2004. As part of the so-called Hartz IV labor-market overhaul program to support low-income groups, the government has spent 50 euros billion in welfare subsidies since 2005 for people who earn too little to make a living."
"Lobby groups for low-paid and unemployed workers worry that an increasing number of jobs have to be subsidized. "Hartz IV has made it possible for companies to get their profit subsidies from the general public, with companies paying starvation wages while those affected need Hartz IV to survive," said Martin Behrsing, spokesman for the Unemployed Forum Germany."
"Another measure for low-income workers is looking at people who earn two-thirds or less of the average income. By that measure, the number of low-paid workers increased by almost 2.3 million people to 6.55 million between 1998 and 2008, according to a recent study by the Institute for Employment and Qualification at the University Duisburg-Essen."
"The Organization for Economic Cooperation and Development's employment outlook report 2010 shows that 21.5% of Germans worked in the low-pay sector in 2008, up from 16% in 1998. In an international comparison, the share of low-paid workers remained unchanged at 24.5% in the U.S. and increased only slightly in the U.K. to 21.2% from 20.8%. The average among OECD countries is 16%."
"I think we have seen in Germany for quite a while now an expansion of the low-wage sector, since the mid, late 1990s," said Herwig Immervoll, an economist with the OECD, which is based in Paris. "There is an increase in the inequality in Germany. We see this in other countries too, but maybe not as much as in Germany."
"Duisburg-Essen University's employment institute puts it even more starkly: "No other country has experienced a similar increase in the low-income sector over the past years and a differentiating of wages to the downside as Germany has," it says in its study."
"The upswing hasn't reached me. What I am witnessing is exploitation. There is more and more low-paid work. People don't find work, and if so only as temporary work, which is a great mistake because it's destroying the wage system," Mr. Friedrich said. "It might well be that the upswing has reached the big companies and that they are making more money, but it's the opposite for the ordinary guy," he said."
"Such sentiments are weighing on Ms. Merkel's center-right government, whose popularity has been tumbling in opinion polls that increasingly favor the center-left opposition. One recent poll showed that four out of five Germans say they aren't personally benefiting from the rebound."
"Hubertus Heil, deputy parliamentary floor leader of the opposition Social Democrats, is angry about the increasing number of subsidized jobs and said a legally binding minimum wage is urgently needed. "It's a shame that people who work full time have to put up with this," he said."
"At present, Germany has no general minimum-wage level. Minimums do exist for specific sectors, such as for the construction, cleaning, waste and nursing sectors. To match the minimum-wage levels in other European countries, Germany would have to introduce hourly minimum pay of between 5.93 euros and 9.18 euros."
"The DGB umbrella group of trade unions has called for an hourly minimum of 8.50 euros. But others, such as the Ifo economic research institute, warn that this could result in the loss of 1.22 million jobs, largely among those earning low incomes."
"Nelli Einstein, a 48-year-old from Berlin, has been selling clothes, bags, jewelry and tools for 1 euros apiece for the past two years. It sometimes takes her as long as a year to sell 10,000 euros of merchandise."
Here is the second article:
Fuhrmans, Vanessa. 2010. "Germany Suffers a Labor Shortage." Wall Street Journal (27 August): p. A 12.
http://online.wsj.com/article/SB10001424052748704913704575453652182261156.html?mod=ITP_pageone_3
"The surprising strength of Germany's economic rebound is exacerbating an already worrying problem for legions of its companie Industrialists and economists long have warned of a looming shortage of skilled German labor, a consequence of the country's declining birth rate and an exodus in recent year of engineers and other highly trained workers, to around the European Union, the U.S. and elsewhere. But the rapid recovery of Germany's export-fueled economy in recent months has suddenly brought the problem home for many domestic companies, which fret that the shortage could restrain their ability to respond to the nascent rebound."
"Though German unemployment still hovers around 7.6%, about 70% of German companies report they are having trouble finding enough master craftsmen, technicians and other skilled labor, according to a survey released this week by the DIHK Association of German Chambers of Industry and Commerce. Companies haven't been able to fill some 36,000 engineering jobs open across the country, the Association of German engineers reports. "
"Bitkom, Germany's largest information-technology industry association, says the same goes for 43,000 IT posts. "
"And this is happening just barely out of the severe recession of 2009," said Hans Heinrich Driftmann, DIHK's president. "As the economy improves and companies need to hire more people, it's only going to get more severe."
"For now, Germany's marquee corporations, such as Siemens AG and BMW AG, have enough skilled job applicants, thanks to aggressive recruiting and generous training programs. But many of the country's Mittelstand, the thousands of small to mid-size companies that are the backbone of its export-led economy and provider of 70% of German jobs, are struggling to find needed employees as demand picks up."
"One is DELO Industrie Klebstoffe GmbH, a Bavarian maker of industrial adhesives. With ?30 million ($38 million) in sales and 230 employees, the family-owned firm is looking to hire another 60 highly skilled workers this year as orders from the electronics, auto and other industries take off. But so far, filling the posts has been difficult."
"We're troubled most of all by the search for technicians and engineers," said DELO Executive Director Sabine Herold. Located near Munich, the company says it is tough to compete for skilled job candidates with better-known companies in the area, so Ms. Herold has been trying to forge closer ties to universities and vocational-training institutes, and sponsoring business programs at local high schools."
""If we're going to expand further, we need smart people right away," Ms. Herold said. "But a lot of school graduates don't know us.""
"Behind the growing shortage is a combination of demographic trouble spots. Like in many European countries, Germany's declining birth rate-at 1.38 children born per woman on average in 2009-isn't enough to keep its population stable. And since 2008, more people have been leaving Germany than immigrating to it. That tendency is particularly strong among those with university or vocational training degrees. Last year, some 27,500 post-secondary-school graduates came to Germany from other European countries, for example, while 32,000 left for elsewhere in the European Union. "
"Economists estimate the skilled worker shortage is resulting in annual economic loss of between 15 billion euros and 20 billion euros, and with that, more potential jobs. "If there isn't enough skilled labor, then there can't be more production," said Klaus Zimmermann, president of the DIW German Institute for Economic Research. "
"Major companies are acting to counter the trend longer term. BMW and Siemens, for example, have expanded in recent years programs that train apprentices in specialized technical fields as they pursue post-secondary degrees at universities or technical colleges, thereby compressing the training time before they can fully join the work force."
""They don't have any difficulties getting hired. They're in great demand," said Gnther Hohlweg, head of Siemens' training programs, who adds that 90% remain with Siemens."
"Others are using older workers. German auto-supplier giant Robert Bosch GmbH maintains a reserve of several hundred semiretired skilled employees between ages 60 and 75 that it taps when it has to ramp up production and can't find enough qualified labor on short notice."
"Daimler AG, which manufacturers Mercedes-Benz cars, anticipates that within 10 years half of its workers will be older than 50 years, compared with 25% now. To accommodate them, it has introduced more flexible shift rotations and installed strength-training equipment near plant assembly lines. According to this month's DIHK survey, 21% of the 1,600 companies polled said they would take steps to draw more older workers."
"As Germany's economy has gathered strength in recent months, the skilled-worker shortage has reignited a debate about immigration policies, and created a new source of tension within Germany's center-right governing coalition."
"Earlier this month, the country's economics minister, Rainer Bruderle, proposed introducing cash "welcome" payments to lure more skilled foreign workers to Germany, as well as lowering the minimum income level it requires for skilled workers to be eligible for extended immigrant status. The current annual income level is 66,000 euros, which many economists and companies say is too high."
"The proposals were quickly rejected by labor leaders, as well as a spokesman for Chancellor Angela Merkel, who said the government just introduced immigration policies in January 2009 aimed at making it easier for foreigners trained in Germany to find work there, and their effect had yet to be felt."
Should Alan Simpson Be Forced To Resign Or To Publicly Debate?
As has been widely reported, Co-Chair of the Deficit Reduction Commission, former Senator Alan Simpson (R-WY) told some people from the Elderly Womens' League that social security is a system that involves "310 million tits." Many have called for his resignation, and I would say that quite aside from the obnoxiousness of such a comment, his presumption that "social security is a problem" certainly calls for it.
However, rdan over at angry bear says that he should not be removed. This would just lead to him being replaced by some other anti-social security slug, and things would proceed as before. Instead, he should be forced to debate the issue on TV, either before or after the upcoming elections. I do not know which is better, but I am certainly concerned that the key people on that commission are so stacked to attacking social security, most likely through raising the future retirement age, when it appears that some groups of the population that may need social security the most, such as poor women, may actually be experiencing decreasing life expectancies.
However, rdan over at angry bear says that he should not be removed. This would just lead to him being replaced by some other anti-social security slug, and things would proceed as before. Instead, he should be forced to debate the issue on TV, either before or after the upcoming elections. I do not know which is better, but I am certainly concerned that the key people on that commission are so stacked to attacking social security, most likely through raising the future retirement age, when it appears that some groups of the population that may need social security the most, such as poor women, may actually be experiencing decreasing life expectancies.
The Problem with Welfare Economics
Uwe Reinhardt repeats a familiar refrain from critics of welfare economics, that compensation tests do not erase the value judgments implicit in ignoring the distributional effects of policy. This goes way, way back, and Reinhardt might have been more forthcoming about the attempts by economists to bring distribution back in via refinements to benefit-cost analysis and other techniques. His point remains pertinent, but it misses the real problem with welfare economics.
Welfare econ rests on utility (or “preference”) theory, the idea that a person’s well-being has a stable and predictable relationship to the consumption choices they make. Reinhardt worries that economists are simply adding up utility gains and losses without taking into account who’s winning or losing, but the more fundamental issue is whether utility (or “preference satisfaction”) has any validity to begin with.
There are two deep problems with welfare economics. The first is that it actually assumes that well-being is identical to consumption choices. The absurdity of this proposition was demonstrated decades ago in several pungent articles by Amartya Sen, and no one, to my knowledge, has successfully rebutted him. The empirical failure of this assumption has more recently been exposed by “happiness studies”. There are raging disputes between happyologists (on the Easterlin paradox, for instance), but there is no doubt any more that, on an individual level, a chasm has opened up between “preference satisfaction” via consumption and empirical measures of well-being.
The second problem is that welfare economics depends on the assumption that choices are rational, that utility is actually maximized by each choice made by each individual in each situation. If you’ve paid any attention to behavioral economics, you’ll know that one went out the window some time ago.
So the problem is not just that economics fudges the distribution of utility, but that utility itself has become a sort of phlogiston, a make-believe substance that once served to prop up a theory, but got put to death by the evidence and is now no more than a curiosity studied by antiquarians and professional Scrabble players.
Welfare econ rests on utility (or “preference”) theory, the idea that a person’s well-being has a stable and predictable relationship to the consumption choices they make. Reinhardt worries that economists are simply adding up utility gains and losses without taking into account who’s winning or losing, but the more fundamental issue is whether utility (or “preference satisfaction”) has any validity to begin with.
There are two deep problems with welfare economics. The first is that it actually assumes that well-being is identical to consumption choices. The absurdity of this proposition was demonstrated decades ago in several pungent articles by Amartya Sen, and no one, to my knowledge, has successfully rebutted him. The empirical failure of this assumption has more recently been exposed by “happiness studies”. There are raging disputes between happyologists (on the Easterlin paradox, for instance), but there is no doubt any more that, on an individual level, a chasm has opened up between “preference satisfaction” via consumption and empirical measures of well-being.
The second problem is that welfare economics depends on the assumption that choices are rational, that utility is actually maximized by each choice made by each individual in each situation. If you’ve paid any attention to behavioral economics, you’ll know that one went out the window some time ago.
So the problem is not just that economics fudges the distribution of utility, but that utility itself has become a sort of phlogiston, a make-believe substance that once served to prop up a theory, but got put to death by the evidence and is now no more than a curiosity studied by antiquarians and professional Scrabble players.
Thursday, August 26, 2010
Matt Bye
In an earlier post, I expressed my initial hopes and later disillusionment with Matt Bai. But it’s worse than that, folks. In today’s Times, Bai writes
No: it’s like saying you’re rich because you have ten million bucks in Treasury bonds.
What would Bai prefer the Social Security Trust Fund invest in, Cuban cigar futures? Timeshares in Greece?
The finances of SS are just fine, thank you. And no matter how you juggle the money, the consumption of every retired generation is produced by those who are working at the time. Either you are willing to pony up for the geezers or you aren’t. Matt is apparently a catfood kind of guy.
The coalition bases its case on the idea that Social Security is actually in fine fiscal shape, since it has amassed a pile of Treasury Bills — often referred to as i.o.u.’s — in a dedicated trust fund. This is true enough, except that the only way for the government to actually make good on these i.o.u.’s is to issue mountains of new debt or to take the money from elsewhere in the federal budget, or perhaps impose significant tax increases — none of which seem like especially practical options for the long term. So this is sort of like saying that you’re rich because your friend has promised to give you 10 million bucks just as soon as he wins the lottery.
No: it’s like saying you’re rich because you have ten million bucks in Treasury bonds.
What would Bai prefer the Social Security Trust Fund invest in, Cuban cigar futures? Timeshares in Greece?
The finances of SS are just fine, thank you. And no matter how you juggle the money, the consumption of every retired generation is produced by those who are working at the time. Either you are willing to pony up for the geezers or you aren’t. Matt is apparently a catfood kind of guy.
Wednesday, August 25, 2010
Charles Walgreen, Chicago Economics, and Prohibition
Charles Walgreen was a major influence on Chicago economics, both leading witch hunts against unreliable academics and funding others, including George Stigler, who used these resources to significantly shape the discipline of economics. Here is another take on his career.
Okrent, Daniel. 2010. Last Call: The Rise and Fall of Prohibition (New York: Simon and Schuster).
197: Charles Walgreen ... who built his Chicago-based chain from nine locations in 1916 to twenty four years later. In 1922, Walgreens introduced the milk shake, which family histories have credited the chain's next growth spurt. But it's doubtful that milk shakes alone were responsible for Walgreens rocketing expansion from 20 stores to an astonishing 525 during the 1920s. Something Charles Walgreen Jr. told an interviewer many years later suggests another possibility. The elder Walgreen worried about fire breaking out in his stores, his son recalled, but this apprehension transcended concern for his employees: he "wanted to get in as fast as possible and to get out as fast as possible, Charles Jr. remembered, "because whenever they came in we'd always loose a case of liquor from the back."
Okrent, Daniel. 2010. Last Call: The Rise and Fall of Prohibition (New York: Simon and Schuster).
197: Charles Walgreen ... who built his Chicago-based chain from nine locations in 1916 to twenty four years later. In 1922, Walgreens introduced the milk shake, which family histories have credited the chain's next growth spurt. But it's doubtful that milk shakes alone were responsible for Walgreens rocketing expansion from 20 stores to an astonishing 525 during the 1920s. Something Charles Walgreen Jr. told an interviewer many years later suggests another possibility. The elder Walgreen worried about fire breaking out in his stores, his son recalled, but this apprehension transcended concern for his employees: he "wanted to get in as fast as possible and to get out as fast as possible, Charles Jr. remembered, "because whenever they came in we'd always loose a case of liquor from the back."
Social Insurance Is a Good Idea
The current flap over Alan Simpson’s idiotic emails is above all about what kind of guy he is and whether he should be co-leading a high-profile commission for Obama, but behind it is a basic philosophical debate over the concept of social insurance.
The neoliberal caucus, which includes the Pete Petersons, Alan Simpsons and Paul Ryans of this world, believe in incentives. Each one of us, at every moment, should have an unmistakable incentive to work as much as possible, save as much as possible, and do everything else to promote economic growth. Marginal tax rates should be rock-bottom, and no government program should shield us from the consequences of our failure to accumulate wealth. It is pure social darwinism.
Their sworn enemy is social insurance, the idea that the members of a society would want to pool their risks and achieve a bedrock of security. This means opposition to any form of national health insurance, which pools our medical expense risk, Social Security, which pools retirement risk, and unemployment insurance, which pools labor market risk. We should be prepared, they say, to sink or swim on our own and not look to the “nanny state” to take care of us.
I think it’s time for the other side, a.k.a. the forces of civilization and progress, to defend social insurance. It is an enormous advance for a society provide economic security to all its citizens. It gives us peace of mind, and it expresses a humane concern for the well-being of all members of the community, something we should not be ashamed to embrace as a moral principle.
Sure, insurance always comes bundled with moral hazard issues. Some people will react by doing things that increase the risks we insure against. But this is not a reason to abandon insurance, just to design programs carefully so that moral hazard doesn’t get out of hand. If you think Social Security has generated disincentives that need to be fixed, indicate what they are and help come up with solutions. Don’t reject insurance itself; it’s one of the highest achievements of the last thousand years of human development.
The neoliberal caucus, which includes the Pete Petersons, Alan Simpsons and Paul Ryans of this world, believe in incentives. Each one of us, at every moment, should have an unmistakable incentive to work as much as possible, save as much as possible, and do everything else to promote economic growth. Marginal tax rates should be rock-bottom, and no government program should shield us from the consequences of our failure to accumulate wealth. It is pure social darwinism.
Their sworn enemy is social insurance, the idea that the members of a society would want to pool their risks and achieve a bedrock of security. This means opposition to any form of national health insurance, which pools our medical expense risk, Social Security, which pools retirement risk, and unemployment insurance, which pools labor market risk. We should be prepared, they say, to sink or swim on our own and not look to the “nanny state” to take care of us.
I think it’s time for the other side, a.k.a. the forces of civilization and progress, to defend social insurance. It is an enormous advance for a society provide economic security to all its citizens. It gives us peace of mind, and it expresses a humane concern for the well-being of all members of the community, something we should not be ashamed to embrace as a moral principle.
Sure, insurance always comes bundled with moral hazard issues. Some people will react by doing things that increase the risks we insure against. But this is not a reason to abandon insurance, just to design programs carefully so that moral hazard doesn’t get out of hand. If you think Social Security has generated disincentives that need to be fixed, indicate what they are and help come up with solutions. Don’t reject insurance itself; it’s one of the highest achievements of the last thousand years of human development.
Tuesday, August 24, 2010
Administrative Bloat in Education
In addition to the higher salaries for university executives, academic management is continually becoming more bloated. In effect, picking up the worst practices of corporate America. Here is the report from the Goldwater Institute.
http://www.goldwaterinstitute.org/file/4942/download/4944 (.pdf)
http://www.goldwaterinstitute.org/file/4942/download/4944 (.pdf)
Victim's Daughter Speaks Out On Sterling Hall Bombing 40th Anniversary
Today, August 24, 2010, is the 40th anniversary of the bombing of Sterling Hall on the University of Wisconsin-Madison campus. For the first time since then, family of the anti-war physics researcher, Robert Fassnacht, who was killed in the bombing, have spoken publicly, notably his daughter, Heidi, in this past Sunday's Wisconsin State Journal.
She reports that the family is doing fine, and his son is now a professional astronomer. She also reports that at the time of his death, it was believed by many around him that Robert Fassnacht was nearing a scientific breakthrough in cryogenics that might have aided long distance electricity transmission. He was up late keeping an eye on the Dewar flask of liquid helium for supercooling in his lab's experiments. The last person who saw him alive was a security guard who saw him at 3:30 AM and reminded him to turn off the lights when he was done. The guard saw him sitting at his desk "furiously scribbling notes on a pad" that was destroyed by the bomb, along with all the lab's equipment, which went off 12 minutes later.
The anniversary has also brought forth the start of an oral history project about the bombing on the UW-Madison campus, which is to result in a play in Spring 2012, as reported in the Milwaukee Journal-Sentinel. The online commentary there is pretty bizarre.
Leo Burt, one of the four bombers, remains at large. Of the others, all of whom served prison time, Karl Armstrong runs a fruit juice stand in Madison; David Fine is a paralegal in Oregon, and Karl's younger brother, Dwight, died earlier this year. A late comment on that post on Aug. 6 by "Christopher" sympathetically describes the much-troubled Dwight in his final year of life.
In my earlier post I reported that Karl Armstrong had unequivocally apologized for his actions, something that is not what one sees in some sources. In tracking this down for confirmation of what I heard in person, I came across a fascinating 72-page senior honors thesis (.pdf) from Lawrence University in 2004 by Andrea Rochelle Blimling entitled, "Blood on the Third Coast: Consequences of Madison's 1970 Sterling Hall Bombing". This is extremely interesting and largely accurate, as near as I can tell and remember. One can find a statement of remorse by Karl Armstrong on p. 55, and an account of what I reported on p. 58, although it differs slightly from my memory (its source is Paul Soglin, then Madison's mayor, who was in attendance as I reported). I remember Karl Armstrong saying more than Soglin recalls, and I recall dead silence after his speech, with no attempted rebuke by Ken Mate.
BTW, I found this thesis while searching for an article in the Wisconsin State Journal that reported Armstrong's apology, but could not find it. However, I remember it well because my father read it and snorted in disgust and skepticism at the report of this apology. It was probably the last comment my father made on the matter, as he died less than two months later.
For the historical record, I note some minor errors in the otherwise very well done senior honors thesis.
The Dow demonstrations of October 1967 were a year and a half after the Selective Service demonstrations of Spring, 1966, not the "next semester."
The name of the local Congressman was "Kastenmeier," not "Kastenmeyer."
The anti-war Teach-In of 1965 took place in 6210 Social Science, not its supposed "Great Hall." The Great Hall is on the fourth floor of the Memorial Union and has been the site of many events, including many political ones, but many others as well, including the retirement dinner of my late father in 1978, Director at the time of the bombing of the Center that was the target.
Most of the Center's offices were on lower floors than the seventh, although above the labs that were hit by the bombing.
The protester who was unhappy with Paul Soglin in 2004 was Lee "Zeldin," not "Zelbin."
And the report pointed out an error in my posting. It was 2003, not 2005, when Paul Soglin ran again for mayor, and lost, being "the most conservative candidate" running.
My final comment on the anniversary of this tragedy, besides being glad to hear that Robert Fassnacht's family is doing well, is to hope as Peter Dorman noted in comments on my last posting, that if Leo Burt is still alive (or even if he is dead as many think), that he did or has made something useful of his life on the lam to somehow atone for what he did on August 24, 1970.
She reports that the family is doing fine, and his son is now a professional astronomer. She also reports that at the time of his death, it was believed by many around him that Robert Fassnacht was nearing a scientific breakthrough in cryogenics that might have aided long distance electricity transmission. He was up late keeping an eye on the Dewar flask of liquid helium for supercooling in his lab's experiments. The last person who saw him alive was a security guard who saw him at 3:30 AM and reminded him to turn off the lights when he was done. The guard saw him sitting at his desk "furiously scribbling notes on a pad" that was destroyed by the bomb, along with all the lab's equipment, which went off 12 minutes later.
The anniversary has also brought forth the start of an oral history project about the bombing on the UW-Madison campus, which is to result in a play in Spring 2012, as reported in the Milwaukee Journal-Sentinel. The online commentary there is pretty bizarre.
Leo Burt, one of the four bombers, remains at large. Of the others, all of whom served prison time, Karl Armstrong runs a fruit juice stand in Madison; David Fine is a paralegal in Oregon, and Karl's younger brother, Dwight, died earlier this year. A late comment on that post on Aug. 6 by "Christopher" sympathetically describes the much-troubled Dwight in his final year of life.
In my earlier post I reported that Karl Armstrong had unequivocally apologized for his actions, something that is not what one sees in some sources. In tracking this down for confirmation of what I heard in person, I came across a fascinating 72-page senior honors thesis (.pdf) from Lawrence University in 2004 by Andrea Rochelle Blimling entitled, "Blood on the Third Coast: Consequences of Madison's 1970 Sterling Hall Bombing". This is extremely interesting and largely accurate, as near as I can tell and remember. One can find a statement of remorse by Karl Armstrong on p. 55, and an account of what I reported on p. 58, although it differs slightly from my memory (its source is Paul Soglin, then Madison's mayor, who was in attendance as I reported). I remember Karl Armstrong saying more than Soglin recalls, and I recall dead silence after his speech, with no attempted rebuke by Ken Mate.
BTW, I found this thesis while searching for an article in the Wisconsin State Journal that reported Armstrong's apology, but could not find it. However, I remember it well because my father read it and snorted in disgust and skepticism at the report of this apology. It was probably the last comment my father made on the matter, as he died less than two months later.
For the historical record, I note some minor errors in the otherwise very well done senior honors thesis.
The Dow demonstrations of October 1967 were a year and a half after the Selective Service demonstrations of Spring, 1966, not the "next semester."
The name of the local Congressman was "Kastenmeier," not "Kastenmeyer."
The anti-war Teach-In of 1965 took place in 6210 Social Science, not its supposed "Great Hall." The Great Hall is on the fourth floor of the Memorial Union and has been the site of many events, including many political ones, but many others as well, including the retirement dinner of my late father in 1978, Director at the time of the bombing of the Center that was the target.
Most of the Center's offices were on lower floors than the seventh, although above the labs that were hit by the bombing.
The protester who was unhappy with Paul Soglin in 2004 was Lee "Zeldin," not "Zelbin."
And the report pointed out an error in my posting. It was 2003, not 2005, when Paul Soglin ran again for mayor, and lost, being "the most conservative candidate" running.
My final comment on the anniversary of this tragedy, besides being glad to hear that Robert Fassnacht's family is doing well, is to hope as Peter Dorman noted in comments on my last posting, that if Leo Burt is still alive (or even if he is dead as many think), that he did or has made something useful of his life on the lam to somehow atone for what he did on August 24, 1970.
Monday, August 23, 2010
Inflation Fear Mongering
Our graph shows the interest rate on 10-year Treasuries from April 1, 2009 to now. Notice a bit of interest rate volatility with rates at times climbing to around 4 percent but the current interest rate being near 2.6 percent.
Scott Lanman and Simon Kennedy report that Raghuram Rajan is arguing for tight monetary policy. Paul Krugman rightfully ridicules this policy recommendation but he lets this particular line go untouched:
Between June 3 and June 8, 2009, yields on 10-year Treasuries rose to 3.88 percent from 3.54 percent after the smallest drop in U.S. payrolls in eight months
Why do we care that interest rates rose by 34 basis points in a week over a year ago in light of the fact that the interest rate on 10-year Treasury bills is now done around 2.6 percent? Does Lanman and Kennedy really think the slightest tendency to see decent real GDP growth is going to cause rising inflation and nominal interest rates?
Sunday, August 22, 2010
Excessive Compensation -- Academic Style
Higher education is not undergoing something like the financial reengineering craze that was so popular and so destructive in corporate America more than a decade ago -- cutting back on the workers and loading university presidents of million dollar salaries and perqs.
Here is the New York Times take on the lavish housing expenditures for Mark Yudof, president of the University of California. Everyone else is expected to willingly accept the necessary sacrifices for the good of the organization. The article begins with a "midnight move ... the latest chapter in a two-year housing drama that has cost the university more than $600,000 and has drawn senior U.C. officials into an increasingly time-consuming and acrimonious ordeal over the president’s private residence."
Fainaru, Steve. 2010. "University Head’s Housing Raises Ire." New York Times (21 August): p. A 23A.
http://www.nytimes.com/2010/08/22/education/22bcyudof.html?_r=2&ref=us&pagewanted=all
Here is the New York Times take on the lavish housing expenditures for Mark Yudof, president of the University of California. Everyone else is expected to willingly accept the necessary sacrifices for the good of the organization. The article begins with a "midnight move ... the latest chapter in a two-year housing drama that has cost the university more than $600,000 and has drawn senior U.C. officials into an increasingly time-consuming and acrimonious ordeal over the president’s private residence."
Fainaru, Steve. 2010. "University Head’s Housing Raises Ire." New York Times (21 August): p. A 23A.
http://www.nytimes.com/2010/08/22/education/22bcyudof.html?_r=2&ref=us&pagewanted=all
Friday, August 20, 2010
Subprime Education Scam: Guaranteed by Government
At a time when the country is getting ready to gut Social Security, Pensions, .... Here is the way our government husbands its resources.
Winkler, Rolfe. 2010. "For-Profit Schools Put in Detention." Wall Street Journal (21 August)
http://online.wsj.com/article/SB10001424052748703579804575441591409292762.html?mod=WSJ_Markets_section_Heard#articleTabs%3Darticle
Early death reports are known to be exaggerated. For-profit educators' may be an example. With Congress and regulators threatening to cut off federal funding, share prices for the industry's top six by market capitalization have dropped by an average of 40% since May. From 2000 to 2009, the industry grew explosively, thanks to increased government spending and Bush-era deregulation permitting aggressive sales tactics. Taxpayer-guaranteed loans and grants flowing to the industry more than quintupled during those years, to $26.5 billion from $4.6 billion."
"Earning risk-free profits on taxpayer-guaranteed loans tends to lead to lower lending standards. Such is the case with firms like Apollo Group, ITT Educational Services and Career Education. They often market to low-income prospects -- eligible for the most aid -- and sell them high-priced degrees, maximizing government largess."
Here is the URL for the GAO study:
http://www.gao.gov/products/GAO-10-948T
I will post some more on this later:
Here is the rest of the Wall Street Journal article:
"ITT's two-year associate degrees can cost as much as $47,000, estimates Kelly Flynn of Credit Suisse. Yet the average starting salary for employed graduates -- 73% of 2009's class found jobs by April -- is only "slightly north" of $30,000, says the company. So default rates are high: 24% so far for loans extended in 2007. On some loans ITT extends itself, the company may assume close to a 45% loss rate up front, Ms. Flynn estimates."
"But losses on loans matter little for the companies. Since 85% of ITT's 2009 revenue came from government funds, taxpayers will suffer the deepest financial wounds. Government revenue for Apollo and Career Education in 2009 was 86% and 80%, respectively."
"Proposed regulations would, among other things, cut off government funds if new tests show the debt burden on students is too high relative to post-graduate earnings. Data released by the Department of Education suggest that, to pass the tests, schools may have to cut tuition significantly. Meanwhile, on Capitol Hill, Sen. Tom Harkin may introduce tough reform legislation after the Government Accountability Office exposed the industry's hard-sell tactics."
"The latest push by schools is to target veterans, whose benefits let for-profit institutions skirt a rule that 10% of sales come from nongovernment sources. Strangely, such benefits count as nongovernment. The top five schools enrolling veterans are for-profit."
"Increased scrutiny will rightly keep the industry in detention for the moment. Although some appear cheap -- Apollo, Career Education and ITT trade at an average of six times 2010 estimated earnings -- it is risky to capitalize future profits that could be legislated away."
"And yet, just as Washington is now helping to crush the stocks, it is also likely to be what makes their longer-term survival likely. For the government to meet its goal of substantially increasing college graduates by 2020, it will need the for-profit sector. One example: Veterans Administration education benefits will increase to $9.5 billion this year from $4.2 billion. The financial aid gravy train that for-profit schools have so adeptly ridden is set to keep rolling."
Winkler, Rolfe. 2010. "For-Profit Schools Put in Detention." Wall Street Journal (21 August)
http://online.wsj.com/article/SB10001424052748703579804575441591409292762.html?mod=WSJ_Markets_section_Heard#articleTabs%3Darticle
Early death reports are known to be exaggerated. For-profit educators' may be an example. With Congress and regulators threatening to cut off federal funding, share prices for the industry's top six by market capitalization have dropped by an average of 40% since May. From 2000 to 2009, the industry grew explosively, thanks to increased government spending and Bush-era deregulation permitting aggressive sales tactics. Taxpayer-guaranteed loans and grants flowing to the industry more than quintupled during those years, to $26.5 billion from $4.6 billion."
"Earning risk-free profits on taxpayer-guaranteed loans tends to lead to lower lending standards. Such is the case with firms like Apollo Group, ITT Educational Services and Career Education. They often market to low-income prospects -- eligible for the most aid -- and sell them high-priced degrees, maximizing government largess."
Here is the URL for the GAO study:
http://www.gao.gov/products/GAO-10-948T
I will post some more on this later:
Here is the rest of the Wall Street Journal article:
"ITT's two-year associate degrees can cost as much as $47,000, estimates Kelly Flynn of Credit Suisse. Yet the average starting salary for employed graduates -- 73% of 2009's class found jobs by April -- is only "slightly north" of $30,000, says the company. So default rates are high: 24% so far for loans extended in 2007. On some loans ITT extends itself, the company may assume close to a 45% loss rate up front, Ms. Flynn estimates."
"But losses on loans matter little for the companies. Since 85% of ITT's 2009 revenue came from government funds, taxpayers will suffer the deepest financial wounds. Government revenue for Apollo and Career Education in 2009 was 86% and 80%, respectively."
"Proposed regulations would, among other things, cut off government funds if new tests show the debt burden on students is too high relative to post-graduate earnings. Data released by the Department of Education suggest that, to pass the tests, schools may have to cut tuition significantly. Meanwhile, on Capitol Hill, Sen. Tom Harkin may introduce tough reform legislation after the Government Accountability Office exposed the industry's hard-sell tactics."
"The latest push by schools is to target veterans, whose benefits let for-profit institutions skirt a rule that 10% of sales come from nongovernment sources. Strangely, such benefits count as nongovernment. The top five schools enrolling veterans are for-profit."
"Increased scrutiny will rightly keep the industry in detention for the moment. Although some appear cheap -- Apollo, Career Education and ITT trade at an average of six times 2010 estimated earnings -- it is risky to capitalize future profits that could be legislated away."
"And yet, just as Washington is now helping to crush the stocks, it is also likely to be what makes their longer-term survival likely. For the government to meet its goal of substantially increasing college graduates by 2020, it will need the for-profit sector. One example: Veterans Administration education benefits will increase to $9.5 billion this year from $4.2 billion. The financial aid gravy train that for-profit schools have so adeptly ridden is set to keep rolling."
The Current Moment in Macropolicy
A week ago, a Portuguese journalist asked me a few questions about current debates in macroeconomic policy: fiscal stimulus and monetary expansion versus deficit and inflation hawkery. I used the opportunity to organize some of the arguments I've presented in previous posts.
1. With near-zero percent interest rates (negative in real terms) and $2.3 trillion balance sheet, and no clear results translated in growth, employment and credit to the real economy, which feasible options has the Federal Reserve? Is the FED playing a dangerous gamble as Kansas City FED’s chairman just said?
These are really two questions: (a) What arrows does the Fed still have in its quiver? (b) Is the Fed’s current set of policies elevating the risk of future inflation?
a) As many, including Ben Bernanke’s former self, have pointed out, the Fed can engage in almost unlimited balance sheet expansion through purchases of private sector debt. Thus, rather than exchanging MBS and similar items as they mature with long-term government debt–the current “hold steady” policy–the Fed could acquire even more. This option is predicated on the assumption that the economy can absorb much more liquidity, that the true risk is deflation rather than inflation. My own view is that a bit of additional quantitative easing can help at the margin, but that fiscal policy would more effectively offset the effects of private sector deleveraging on effective demand. Moreover, the level of private sector debt acquisition necessary to fully absorb this deleveraging would expose the Fed, and US taxpayers, to significant credit risk.
Another proposal is that the Fed should raise its announced inflation target. This originates with Krugman and is receiving a lot of support. To see why this may not work, note that it rests on two premises: first, that agents will adopt the target as their new basis for calculating real interests rates (making real rates more negative at the zero nominal lower bound), and that this recalculation will induce them to resume borrowing. The first is rather a leap under current conditions; why should agents believe that the announced target will be realized within their planning horizons? The second overlooks the fact that (1) many sectors of the US economy really are overleveraged and need to reduce their debt burdens, and (2) investment is stymied by a lack of anticipated demand, not the real cost of credit. But I don’t think raising the target will cause any harm, so why not? It would then be more consistent with the emerging view of (some) macroeconomists that the optimal inflation band in normal times may have an upper bound of 3-4%.
I should add that the weight now being placed on the Fed’s shoulders is unfair. Everyone is looking to them to forestall a second dip and put the US (and world) economy on a growth track, but that’s because we have given up on Obama’s willingness/ability to push significant policy through Congress. The Fed just can’t do it alone; it needs lots of help. The political paralysis in the US is an extremely important contextual factor. If the global economy does take a second plunge or simply remains mired for a prolonged period, future historians will surely place much more of the blame on Obama and Congress than Bernanke and the Fed. But they will also have harsh words for the failure of global policy coordination, with no leader willing to rise above short-term domestic political motives.
b) In the short run it is obvious that inflation is not a problem. First, it would require monetary expansion of Zimbabwean proportions to induce serious inflation at current levels of unemployment and productive slack. Second, a bit more inflation would be a good thing. The real question is, if the Fed continues to bulk up its balance sheet and private sector credit starts flowing again, can the Fed get out in time so that there isn’t an explosion in the money supply? Most economists, myself included, think that easing of credit conditions will be gradual and visible, so that the Fed can exit as the private sector reabsorbs its debt. From a political point of view, to allow a given stock of debt to shift back from public to private hands is neutral with respect to macropolicy, so there is no reason to expect that the Fed will fail to do this. Having said this, however, I think the risk of a future inflationary surge as a result of current policies is not zero. Deleveraging could be reversed at a speed the Fed can’t keep up with. Or the specific markets that would be impacted by a Fed asset sale might not be sufficiently liquid: the Fed holds asset A and the public wants asset B. Or some other problem, currently unforseen, could interfere with the Fed’s withdrawal from private markets. On balance, though, the near-term risk of deflation exceeds the highly speculative longer-term risk of inflation.
2. Has federal Treasury political support to new Keynesian interventions preventing the risk of a double-dip, or the debt-to-GDP, the fiscal deficit-to-GDP and slightly changes from Chinese Central Bank policy gives no fiscal space for those options?
Rewording, I see the question, do either the trajectory of US fiscal deficits/debt to GDP ratio or the prospects for reduced Chinese demand for this debt limit the ability of the US government to implement a second round of stimulus? Again there are two questions.
a) I think the attempt to impose a mechanical rule for fiscal debt/GDP are misguided and have no basis in the historical evidence. The reason is that fiscal deficits are endogenous: they are jointly determined by private sector debt growth, the external balance, terms of trade, and other factors that influence both the numerator and the denominator. (And politics, of course.) Economics has a lot to say about the exact ways these factors interact, but in any given situation you have to evaluate policy on the basis of the full set of variables. For instance, to make an obvious point, on the one hand the US has for some time had a structural trade deficit of substantial proportions, and the economy has organized itself around chronically high private and public deficits. (We are biased toward the production of goods financed by these deficits: housing, military goods, etc.) On the other, the dollar remains the world’s primary reserve currency, and this fact permits the US to borrow much more than others might–the “exorbitant privilege”, in Eichengreen’s term. (Portugal too could borrow much more if the ECB were willing to underwrite all your debt, which they aren’t. We don’t have this problem with the Fed in the US.) In a nutshell, I don’t think the US faces an immediate constraint on its ability to market its public debt, and the deeper problem is the current account imbalance that necessitates this debt.
b) There are many aspects, some rather complex, in the China-US financial relationship, but the broad outlines are simple. China, along with the other surplus countries, finances US net borrowing, and the reason this net borrowing needs to be financed is that these countries have surpluses vis-a-vis the US. In principle, the solution is rebalancing, which would mean less financing and less debt, simultaneously and equally. In real life, of course, there are potential potholes in this road. The main risk is that there could be a sudden stop if confidence in dollar assets drops unexpectedly. This risk is ever-present and is proportional, more or less, to the scale of dollar recycling. Therefore a gradual Chinese retrenchment, if it means reduced trade surpluses, directly or indirectly, with the US, would be very positive for the world economy.
But it’s not only China. The US runs deficits with the EU, the oil exporters and just about everyone else. We need rebalancing on every front. This would remove much of the need for Keynesian stimulus in the US. It should be obvious: a country with a roughly balanced current account finances episodes of fiscal stimulus domestically. A deficit country is likely to require more stimulus more often and must finance to some extent externally. This second condition is less sustainable. You would think we wouldn’t have to argue about this.
3. America and Europe is living a deficit hysteria regarding the hot topic of “debt-to-growth”, or a deficit threshold is a real problem for future growth?
Hysteria.
4. You refer, in your critic of Rogoff and Reinhart debt-to-GDP threshold that the most important is to identify the processes, the mechanisms governing the expansion and contraction of fiscal space. Can you argue more extensively about that?
I think I did this above, up to a point. Perhaps I should emphasize the particular importance of looking at public debt in the context of private debt. The US ran fiscal surpluses under Clinton, but this was possible (especially in a deficit country) only to the extent that private debt exploded. Private deficits fell in the aftermath of the dot.com bubble, and (again in the context of external deficits) the US faced the choice between much higher fiscal deficits or punishing shortfalls in aggregate demand. We went with the fiscal deficits in the 00's, especially since we didn’t face a borrowing constraint. Spain, by contrast, was a model of fiscal rectitude in the 00's, but their external deficits were monumental and financed by private leverage. The collapse of the housing bubble puts Spain in a position like the US in 2002, except (1) Spain’s current account deficit is even larger, and (2) they face a severe borrowing constraint. The moral of the story is that anyone who looked at the US in the 90's or Spain in the 00's and said, “No problem, the public budget is under control” would be making a big mistake. (And to dig back in history, the US emerged from WWII with a gargantuan public debt, far beyond the R&R threshold, but with little private debt in the wake of Depression-era writedowns, and the prospect of large, continuing structural trade surpluses.)
I used the R-R thesis as an opportunity to make a more general point about economics, what it can do well and what it can’t. Economists try to be like physicists, formulating the “laws of nature”. The Reinhart/Rogoff 90% rule is a rough version of this approach, aspiring to provide something like a gravitational constant. But the subject matter of economics is too complex for this approach; it is more like geology or ecology. A geologist does not have a formula that explains the location and height of every mountain range on earth, or even the “mean mountain”, but detailed knowledge of the forces (plate tectonics, erosion, isostatic uplift, etc.) that constitute the menu of possibilities. Then he or she goes to a particular region, provides a deep description of the local factors at work, and applies the knowledge of geological processes.
It is revealing that R&R have very little to say about processes–exactly how public debt/GDP ratios affect further growth. Their comments in this respect are casual, not the product of careful research. Instead, they search for a single, simple pattern in growth/debt ratio space. It is ineffective physics, rather than the geology we actually need.
1. With near-zero percent interest rates (negative in real terms) and $2.3 trillion balance sheet, and no clear results translated in growth, employment and credit to the real economy, which feasible options has the Federal Reserve? Is the FED playing a dangerous gamble as Kansas City FED’s chairman just said?
These are really two questions: (a) What arrows does the Fed still have in its quiver? (b) Is the Fed’s current set of policies elevating the risk of future inflation?
a) As many, including Ben Bernanke’s former self, have pointed out, the Fed can engage in almost unlimited balance sheet expansion through purchases of private sector debt. Thus, rather than exchanging MBS and similar items as they mature with long-term government debt–the current “hold steady” policy–the Fed could acquire even more. This option is predicated on the assumption that the economy can absorb much more liquidity, that the true risk is deflation rather than inflation. My own view is that a bit of additional quantitative easing can help at the margin, but that fiscal policy would more effectively offset the effects of private sector deleveraging on effective demand. Moreover, the level of private sector debt acquisition necessary to fully absorb this deleveraging would expose the Fed, and US taxpayers, to significant credit risk.
Another proposal is that the Fed should raise its announced inflation target. This originates with Krugman and is receiving a lot of support. To see why this may not work, note that it rests on two premises: first, that agents will adopt the target as their new basis for calculating real interests rates (making real rates more negative at the zero nominal lower bound), and that this recalculation will induce them to resume borrowing. The first is rather a leap under current conditions; why should agents believe that the announced target will be realized within their planning horizons? The second overlooks the fact that (1) many sectors of the US economy really are overleveraged and need to reduce their debt burdens, and (2) investment is stymied by a lack of anticipated demand, not the real cost of credit. But I don’t think raising the target will cause any harm, so why not? It would then be more consistent with the emerging view of (some) macroeconomists that the optimal inflation band in normal times may have an upper bound of 3-4%.
I should add that the weight now being placed on the Fed’s shoulders is unfair. Everyone is looking to them to forestall a second dip and put the US (and world) economy on a growth track, but that’s because we have given up on Obama’s willingness/ability to push significant policy through Congress. The Fed just can’t do it alone; it needs lots of help. The political paralysis in the US is an extremely important contextual factor. If the global economy does take a second plunge or simply remains mired for a prolonged period, future historians will surely place much more of the blame on Obama and Congress than Bernanke and the Fed. But they will also have harsh words for the failure of global policy coordination, with no leader willing to rise above short-term domestic political motives.
b) In the short run it is obvious that inflation is not a problem. First, it would require monetary expansion of Zimbabwean proportions to induce serious inflation at current levels of unemployment and productive slack. Second, a bit more inflation would be a good thing. The real question is, if the Fed continues to bulk up its balance sheet and private sector credit starts flowing again, can the Fed get out in time so that there isn’t an explosion in the money supply? Most economists, myself included, think that easing of credit conditions will be gradual and visible, so that the Fed can exit as the private sector reabsorbs its debt. From a political point of view, to allow a given stock of debt to shift back from public to private hands is neutral with respect to macropolicy, so there is no reason to expect that the Fed will fail to do this. Having said this, however, I think the risk of a future inflationary surge as a result of current policies is not zero. Deleveraging could be reversed at a speed the Fed can’t keep up with. Or the specific markets that would be impacted by a Fed asset sale might not be sufficiently liquid: the Fed holds asset A and the public wants asset B. Or some other problem, currently unforseen, could interfere with the Fed’s withdrawal from private markets. On balance, though, the near-term risk of deflation exceeds the highly speculative longer-term risk of inflation.
2. Has federal Treasury political support to new Keynesian interventions preventing the risk of a double-dip, or the debt-to-GDP, the fiscal deficit-to-GDP and slightly changes from Chinese Central Bank policy gives no fiscal space for those options?
Rewording, I see the question, do either the trajectory of US fiscal deficits/debt to GDP ratio or the prospects for reduced Chinese demand for this debt limit the ability of the US government to implement a second round of stimulus? Again there are two questions.
a) I think the attempt to impose a mechanical rule for fiscal debt/GDP are misguided and have no basis in the historical evidence. The reason is that fiscal deficits are endogenous: they are jointly determined by private sector debt growth, the external balance, terms of trade, and other factors that influence both the numerator and the denominator. (And politics, of course.) Economics has a lot to say about the exact ways these factors interact, but in any given situation you have to evaluate policy on the basis of the full set of variables. For instance, to make an obvious point, on the one hand the US has for some time had a structural trade deficit of substantial proportions, and the economy has organized itself around chronically high private and public deficits. (We are biased toward the production of goods financed by these deficits: housing, military goods, etc.) On the other, the dollar remains the world’s primary reserve currency, and this fact permits the US to borrow much more than others might–the “exorbitant privilege”, in Eichengreen’s term. (Portugal too could borrow much more if the ECB were willing to underwrite all your debt, which they aren’t. We don’t have this problem with the Fed in the US.) In a nutshell, I don’t think the US faces an immediate constraint on its ability to market its public debt, and the deeper problem is the current account imbalance that necessitates this debt.
b) There are many aspects, some rather complex, in the China-US financial relationship, but the broad outlines are simple. China, along with the other surplus countries, finances US net borrowing, and the reason this net borrowing needs to be financed is that these countries have surpluses vis-a-vis the US. In principle, the solution is rebalancing, which would mean less financing and less debt, simultaneously and equally. In real life, of course, there are potential potholes in this road. The main risk is that there could be a sudden stop if confidence in dollar assets drops unexpectedly. This risk is ever-present and is proportional, more or less, to the scale of dollar recycling. Therefore a gradual Chinese retrenchment, if it means reduced trade surpluses, directly or indirectly, with the US, would be very positive for the world economy.
But it’s not only China. The US runs deficits with the EU, the oil exporters and just about everyone else. We need rebalancing on every front. This would remove much of the need for Keynesian stimulus in the US. It should be obvious: a country with a roughly balanced current account finances episodes of fiscal stimulus domestically. A deficit country is likely to require more stimulus more often and must finance to some extent externally. This second condition is less sustainable. You would think we wouldn’t have to argue about this.
3. America and Europe is living a deficit hysteria regarding the hot topic of “debt-to-growth”, or a deficit threshold is a real problem for future growth?
Hysteria.
4. You refer, in your critic of Rogoff and Reinhart debt-to-GDP threshold that the most important is to identify the processes, the mechanisms governing the expansion and contraction of fiscal space. Can you argue more extensively about that?
I think I did this above, up to a point. Perhaps I should emphasize the particular importance of looking at public debt in the context of private debt. The US ran fiscal surpluses under Clinton, but this was possible (especially in a deficit country) only to the extent that private debt exploded. Private deficits fell in the aftermath of the dot.com bubble, and (again in the context of external deficits) the US faced the choice between much higher fiscal deficits or punishing shortfalls in aggregate demand. We went with the fiscal deficits in the 00's, especially since we didn’t face a borrowing constraint. Spain, by contrast, was a model of fiscal rectitude in the 00's, but their external deficits were monumental and financed by private leverage. The collapse of the housing bubble puts Spain in a position like the US in 2002, except (1) Spain’s current account deficit is even larger, and (2) they face a severe borrowing constraint. The moral of the story is that anyone who looked at the US in the 90's or Spain in the 00's and said, “No problem, the public budget is under control” would be making a big mistake. (And to dig back in history, the US emerged from WWII with a gargantuan public debt, far beyond the R&R threshold, but with little private debt in the wake of Depression-era writedowns, and the prospect of large, continuing structural trade surpluses.)
I used the R-R thesis as an opportunity to make a more general point about economics, what it can do well and what it can’t. Economists try to be like physicists, formulating the “laws of nature”. The Reinhart/Rogoff 90% rule is a rough version of this approach, aspiring to provide something like a gravitational constant. But the subject matter of economics is too complex for this approach; it is more like geology or ecology. A geologist does not have a formula that explains the location and height of every mountain range on earth, or even the “mean mountain”, but detailed knowledge of the forces (plate tectonics, erosion, isostatic uplift, etc.) that constitute the menu of possibilities. Then he or she goes to a particular region, provides a deep description of the local factors at work, and applies the knowledge of geological processes.
It is revealing that R&R have very little to say about processes–exactly how public debt/GDP ratios affect further growth. Their comments in this respect are casual, not the product of careful research. Instead, they search for a single, simple pattern in growth/debt ratio space. It is ineffective physics, rather than the geology we actually need.
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